Economic Bulletin. April 2015. Report on the Latin ...€¦ · Jan 2003 = 100 . BANCO DE ESPAÑA 3 ECONOMIC BULLETIN, APRIL 2015 REPORT ON THE LATIN AMERICAN ECONOMY: FIRST HALF OF

BANCO DE ESPAÑA 1 ECONOMIC BULLETIN, APRIL 2015 REPORT ON THE LATIN AMERICAN ECONOMY: FIRST HALF OF 2015

REPORT ON THE LATIN AMERICAN ECONOMY: FIRST HALF OF 2015

In 2014 the economic activity of Latin America grew at a rate of 1.3%, the lowest of the

past decade except for 2009 when the region felt the brunt of the global financial crisis.

This performance prolonged a four-year low-growth phase that was triggered mainly by

external factors (such as the end of the commodity price boom or the decline in the

momentum provided by China) but in which domestic factors have loomed increasingly

large, particularly in the main South American economies. Thus in 2014 the continued

decline in the terms of trade (which accelerated in the second half of the year for the oil

exporting countries due to the oil price slump), the weak foreign demand (particularly from

China) and the tighter external financial conditions were among the key determinants of

the sluggish activity in the region. However there were also domestic factors contributing

to the low growth, such as the fall in investment against a background of worsening

confidence or, in some cases, the application of restrictive macroeconomic policies.

Against this backdrop, in 2014 two countries (Brazil and Venezuela) were hit by “technical”

recessions of varying intensity; another two (Chile and Peru) underwent significant dips in

growth to annual rates of 1%-2%, well below their potential rate, while Colombia and

Mexico showed greater resilience in the year as a whole.

Inflation remained relatively high on average in the five countries with stated inflation

targets, in a setting of exchange rate depreciation and in contrast to the consumer price

containment at global level. There were, however, significant differences between countries.

In Brazil inflation rose significantly in early 2015 (to 8.1% year-on-year in March, due partly

to the rise in administered prices), while in Colombia, Chile, Mexico and Peru year-on-year

inflation was more moderate. A case apart are Argentina and Venezuela, with inflation rates

of around 20% and 65% (the highest in the world), respectively, as a result particularly of

monetary financing of the budget deficit.

The region is addressing the new economic scenario (change of monetary cycle in the

United States, trend towards deceleration in China, low commodity prices) with some

strengths, albeit also with vulnerabilities. Notable among the latter is the worsening of

current account balances in many countries as a result of the decline in the terms of trade,

not counteracted by exchange rate depreciation for the time being, except in Chile. The

ability of monetary and fiscal policies to deal with a less favourable external environment

and slowing domestic demand varies from country to country, but is generally considered

to be less than in 2008 and 2009. Further, while the shocks currently affecting the region

are of a more permanent nature or the output gap is closed, expansionary demand policies

are not appropriate and the counter-cyclical policy response must be more limited. In any

event, save in Brazil, monetary policies are now highly accommodative. The fiscal policy

response is proving to be more heterogeneous, since in some countries it is moderately

counter-cyclical, while in others it is clearly contractionary. The main strengths lie in the

high levels of international reserves, the limited public-sector indebtedness and the

(controlled) exchange rate flexibility. Despite this, the short-term outlook is for low growth

on average across the region, due to the absence of external stimulus and the ongoing

recessionary climate in certain large economies representing nearly 50% of the region’s

GDP. Exchange rates are acting as the first shock absorbers (see Chart 1) and should help

to adjust relative prices and the composition of demand. In any event, there is a need for

structural reforms to restimulate growth based on factors less dependent on the foreign

sector.

Introduction


The performance of the world economy in 2014 H2 and so far this year has been shaped

by three main inter-related developments: the deceleration of the Chinese economy and

the change in its growth pattern, the sustained appreciation of the US dollar (driven by the

divergence in the monetary policy cycles of the main advanced economies, with the euro

area and Japan pressing ahead with their monetary expansion, while the United States

may see interest rate rises this year) and the sharp fall in oil prices. Indeed, after some

years of relative steadiness (around $110 per barrel of Brent), in summer 2014 oil prices

started a dive which in mid-January 2015 culminated in lows of around $45 per barrel of

Brent. They subsequently recovered to $60 per barrel and have held at somewhat below

that level since mid-February. Food and metal prices showed a slightly downward trend in

this same period.

The main advanced economies have performed relatively favourably and in recent months

the cyclical divergences between them have narrowed somewhat as a result of Japan’s

exit from its technical recession, the recovery in the euro area and slightly worse-than-

expected macroeconomic figures in the United States (although this economy’s buoyant

prospects remain in place for the coming quarters). In these economies the strengthening

has generally been underpinned by the recovery of private consumption, fostered by

favourable monetary and financial conditions and by the increased purchasing power of

households associated with improved labour markets and lower inflation. In contrast,

business investment continued to show a certain weakness. Meanwhile, the behaviour of

economic activity differed notably across the various emerging regions, partly reflecting

the impact of the fall in oil prices, according to each economy’s reliance on this commodity.

In particular, emerging Asia’s economies performed positively, although China continued

its gentle slowdown, which proceeded in parallel with the rebalancing of the economy

towards a more sustainable model which gives greater weight to domestic consumption.

With the exception of some emerging areas, inflation held at very low rates (negative in

some cases), which allowed numerous central banks both of advanced and emerging

economies to intensify the expansionary stance of their monetary policies, in contrast to

the expected tightening of interest rates in the United States.

The monetary policy divergences of the main central banks and the fall in oil prices shaped

the behaviour of the international financial markets. Until mid-January there were increases

in volatility, driven by diverse factors: political uncertainty in Greece, risks associated with

the drop in oil prices (doubts as to the resilience of some oil exporting economies and the

External environment

SOURCES: National sources and JP Morgan.

TERMS OF TRADE AND REAL EFFECTIVE EXCHANGE RATE CHART 1

90

100

110

120

130

140

150

160

170

2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1

TERMS OF TRADE REER LATIN AMERICA EXCLUDING ARGENTINA AND VENEZUELA

Jan 2003 = 100


risk of deflation in some developed economies) and geopolitical tensions, most notably in

Russia. Subsequently, from end-January, the announcement of the ECB’s asset purchase

programme and the expansionary measures adopted by other central banks, along with

the partial rebound in and subsequent stabilisation of oil prices, mitigated investors’ risk

aversion. In any event, throughout the period analysed, the divergence of the monetary

policy cycles of the main advanced economies has been reflected in a higher increase in

the volatility of foreign exchange markets than in that of other segments. In this respect,

the dollar continued appreciating against the major currencies. By contrast, ten-year

government debt yields did not reflect the differences between economies to the same

extent, but rather declined across the board in the first part of the period, in a flight to

quality, and subsequently rose slightly.

In turn, the emerging financial markets deteriorated sharply from the beginning of October

2014, basically because of the oil price slump which particularly affected oil exporting

countries. Thus some countries considered vulnerable, such as Russia, saw their most

severe stock market falls and widening of sovereign spreads since the collapse of Lehman

Brothers, although other markets previously notable for the strength of their fundamentals,

such as Mexico, Colombia or Malaysia, were also profoundly affected. In addition, the

appreciation of the dollar lessened the appeal of carry trade transactions in the emerging

markets and led to positions being unwound in the most liquid markets, initiating a period

of capital outflows.

Against this background, the Latin American stock markets performed less favourably

than those of the other emerging economies (see Chart 2), since commodity-related firms

have a greater weight than in other regions. The Latin America dollar-denominated MSCI

index fell by 22.6% between October 2014 and March 2015, compared with the decline of

20.9% in eastern Europe or the rise of 4.6% in Asia. Excluding mining or oil-related sectors,

the fall in the Latin America index is markedly smaller (see Chart 3). Notable in local

currency terms is the fall in the stock markets of the countries most affected (commercially

and fiscally) by the fall in oil prices and in commodities in general (see Chart 3), such as

Colombia (where the market fell by 27% between October and March), Peru (with a drop

of 22%) and Mexico (with a decline of nearly 10% to year-end, although the market

subsequently recovered when oil prices bottomed out and began to recover slightly).

The fall recorded by Brazil (8% in the months examined) is more associated with

idiosyncratic factors, such as the completion of the electoral process at end-October, the

announcement of restrictive monetary and fiscal policies against a background of markedly

weak activity, the difficulty in approving these adjustment measures in Congress, and the

problems besetting the state oil company Petrobras, including the downgrading of its

credit rating to below investment grade.

The sovereign spreads of Latin American countries similarly trended upward from October,

increasing by nearly 130 basis points (bp) to end-March, a worse performance than that of

the other emerging areas (increase of 100 bp in eastern Europe and no change or a slight

decrease in Asia) (see Chart 2). Again, this performance was determined by the sovereign

spreads of the oil exporting countries (see Chart 3), such that the sovereign spread of the

region excluding those countries widened by nearly 40 bp, compared with an increase of

more than 350 bp for the oil exporting countries (80 bp excluding Venezuela). Argentina’s

sovereign spread held steady or tended to narrow, in the absence of any news on external

debt default since summer 2014, while Venezuela’s reached all-time highs as the oil price

slump eroded the country’s main strength (its current account surplus) and the level of

Latin American financial markets and external financing


liquid reserves dropped below the external debt payments scheduled for 2015, raising the

probability of default. The sovereign spreads of Chile and Peru widened moderately (by

17 bp and 30 bp, respectively) in view of their relatively low levels of vulnerability, while that

of Brazil increased by nearly 100 bp for the idiosyncratic reasons described earlier. Long-

term bond yields on local markets did not, on the contrary, show significant upward

movements and generally remained at the levels reached after the May 2013 turmoil.

In keeping with the behaviour of sovereign spreads, the credit risk premia reflected in CDSs

increased throughout the region. In Venezuela the CDS premium rose by nearly 5,000 bp,

meaning that from early January the markets are discounting a probability of default of

100%. For Brazil and Peru, the premia would be compatible with a sovereign rating of BB-,

two notches below the average rating of the region (BB+), and a downgrading of one notch

with respect to October 2014. The markets are also factoring in sovereign rating downgrades

in all countries, especially in Brazil (three notches, so it would lose its investment grade).

Between October 2014 and March 2015, exchange rates showed a general tendency to

depreciate against the dollar, more sharply in Mexico (-12%), Colombia (-23%) and Brazil

SOURCES: Datastream and JP Morgan.

a Stock market indices in dollars.

-1

0

1

2

3

4

5

6

2010 2011 2012 2013 2014

UNITED STATES EURO AREA JAPAN CHINA LATIN AMERICA OTHER DEVELOPED ECON. OTHER EMERGING ASIA OTHER EMERGING ECON. WORLD GROWTH

CONTRIBUTION TO WORLD GDP GROWTH

Annualised quarterly percentage change

GLOBAL MACROECONOMIC AND FINANCIAL INDICATORS Annualised quarterly rate, indices and basis points

CHART 2

40

60

80

100

120

140

160

Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15

MSCI LATIN AMERICA MSCI EASTERN EUROPE

MSCI ASIA S&P 500

EUROSTOXX-50

WORLD STOCK MARKETS (a)

Jan 2013 = 100

100

200

300

400

500

600

700


EMBI LATIN AMERICA EMBI EASTERN EUROPE

EMBI ASIA US HIGH-YIELD BOND

INTEREST RATE SPREADS

bp

3.4

3.5

3.6

3.7

3.8

3.9

4.0

4.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


US 10-YEAR BOND

GERMAN 10-YEAR BOND

MEDIAN OF THE PROJECTIONS BY THE FEDERAL RESERVE COMMITTEE MEMBERS (right-hand scale)

INTEREST RATES

%

%


SOURCES: Datastream, JP Morgan, Bloomberg, Banco Central do Brasil and national statistics.

a Stock exchange indices in dollars.b MSCI Latin America index in local currency.c Bolivia, Ecuador, Colombia, Mexico, Venezuela.d 10-year government bonds in local currency.e 5-year interest rate swap.

FINANCIAL INDICATORS Indices, basis points and percentage points

CHART 3

80

120

160

200

240

280

320

360

400

Jan.-13 May.-13 Sep.-13 Jan.-14 May.-14 Sep.-14 Jan.-15

BRAZIL MEXICO

CHILE PERU

SOVEREIGN SPREADS

bp

70

75

80

85

90

95

100

105

110


BRAZIL (BOVESPA) MEXICO (IPC MEXICO) CHILE (SANTIAGO IGPA) LATIN AMERICA (b)

Jan 2013 = 100

STOCK EXCHANGE INDICES

55

65

75

85

95

105

115


ARGENTINA BRAZIL MEXICO

CHILE COLOMBIA PERU

NOMINAL EXCHANGE RATE AGAINST THE DOLLAR

Jan 2013 = 100

4 5 6 7 8 9

10 11 12 13 14


BRAZIL (e) MEXICO CHILE COLOMBIA PERU

MEDIUM-TERM BOND INTEREST RATE IN LOCAL CURRENCY (d)

pp

500

1,000

1,500

2,000

2,500

3,000

3,500


ARGENTINA VENEZUELA

SOVEREIGN SPREADS

bp

20

40

60

80

100

120

140


LATIN AMERICA LATIN AMERICA, OIL LATIN AMERICA, MINING LATIN AMERICA, INDUSTRY

Jan 2013 = 100

STOCK EXCHANGE INDICES (a)

200

300

400

500

600

700

800


MOST OIL-DEPENDENT COUNTRIES (c)

OTHER LATIN AMERICA

SOVEREIGN SPREADS

bp

80

90

100

110

120

130

140

150

Jan.-09 Jan.-10 Jan.-11 Jan.-12 Jan.-13 Jan.-14 Jan.-15

BRAZIL MEXICO CHILE

COLOMBIA PERU

REAL EFFECTIVE EXCHANGE RATE

Jan 2009=100


(-25%, where the real dipped to 3.3 reais per dollar, its lowest level since 2003) than in the

rest of the region (see Chart 3). In addition to the above, another factor in the depreciation

of the Mexican peso and the Brazilian real was probably their more liquid and deeper

financial markets, which are better equipped for currency hedge transactions than less

liquid markets. The sharp depreciation of these currencies led to the reactivation of the

official intervention programme in Mexico, to renewed interventions via swaps in Brazil

(this programme was finally discontinued in March) and to the non-renewal of the dollar

purchase programme in Colombia. In Venezuela a new foreign exchange market was

started up in which foreign currencies can be freely bought and sold at exchange rates

which are 96% lower than the official rate and near the parallel exchange rate, although the

volume of transactions is very small. This behaviour of nominal exchange rates has passed

through, at least in part, to real rates, reversing in some cases the loss of competitiveness

accumulated since 2009 (see Chart 3).

The information available on capital flows indicates an appreciable moderation of capital

inflows into the region in 2014. This is explained by the decline in direct investment,

which is the non-callable component of financial flows. Thus direct investment inflows

into Latin America as a whole amounted to $140 billion (in annualised terms) in 2014 Q4,

compared with $175 billion in 2013 (see Chart 4). This fall to levels similar to those of

SOURCES: Datastream, Dealogic, JPMorgan, IMF and national statistics.

a Short-term interest rate spreads against the dollar divided by the volatility of exchange rate options.

0

20

40

60

80

100

120

140

160

180

01 02 03 04 05 06 07 08 09 10 11 12 13 14

OTHER BRAZIL COLOMBIA

MEXICO CHILE LATIN AMERICA

12-MONTH CUMULATED FDI FLOWS

$bn

EXTERNAL CAPITAL FLOWS AND FINANCING $bn, percentage points and years

CHART 4

-40 -20

0 20 40 60 80

100 120 140 160

01 02 03 04 05 06 07 08 09 10 11 12 13 14

BRAZIL MEXICO COLOMBIA

OTHER LATIN AMERICA

12-MONTH CUMULATED PORTFOLIO INVESTMENT FLOWS

$bn

0 5 10 15 20 25

Brazil

Mexico

Chile

Colombia

Peru

Argentina

Other

SOVEREIGNS BANKS PRIMARY SECTOR OTHER CORPORATES

$bn

INTERNATIONAL ISSUANCE IN LATIN AMERICA: FROM OCTOBER 2014 TO MARCH 2015

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15

BRAZIL COLOMBIA MEXICO CHILE

CARRY TRADE RETURN INDICATOR (a)


mid-2011 arose basically from the decline in inflows into Mexico ($21.6 billion less than

in 2013) and, to a lesser extent, into Brazil ($6 billion less). Thus the basic balance

(percentage of the current account deficit covered by direct investment) worsened in

nearly all countries, falling below 1 in Brazil, Colombia and Peru, indicating a greater

reliance on debt to finance their growing external imbalances. However, portfolio inflows

increased during the year in all countries, particularly in Colombia, Mexico and Brazil (in

the latter two cases, in shorter-term instruments), although they moderated towards the

end of the year, in keeping with the loss of the attraction of carry trade transactions in

some of these markets (see Chart 4).

Finally, between October 2014 and March 2015, fixed income issuance by the region

decreased substantially with respect to the previous six months (to $47 billion from

$61 billion), basically as a result of the sharp fall in placements in Brazil, where the corporate

sector issued only $1.1 billion, compared with more than $27 billion in 2014 H1. The

absence from the market of Petrobras, which had raised $13.6 billion in the first six months

of last year, largely explains this decrease; in fact, Petrobras has announced an asset sale

programme to finance part of its operations. Contrastingly, placements in Mexico rose

from $15.6 billion in April-September 2014 to $22.5 billion in the half-year under

examination, with increased activity by the state oil company (43% of total issuance) and

the government (39% of the total). So far the conditions of these issues have not changed

substantially and in fact there has been a slight fall in primary market interest rates and a

lengthening of maturities, with the exception of issues in Brazil, although, as noted above,

their volume has been extraordinarily low.

Amidst the general trend of deceleration, the most notable features of activity and demand

patterns in late 2014 were the unevenness of growth rates and the diversity of cyclical

positions. In some countries, such as Brazil, the deceleration has probably not touched

bottom. By contrast, in others, such as Chile, there are signs of steadiness and even of

recovery of demand. Meanwhile, in Mexico, a recovery based on foreign demand continues

to gather strength, although growth was lower than expected in 2014. These divergences

between countries derive, firstly, from the differing momentum of their main trading

partners (pick-up in the United States and slowdown in China) and, secondly, from agents’

expectations as to macroeconomic policy management and the boost to structural reforms

(which seem to have been positive in Mexico and more uncertain elsewhere). Also, the oil

price slump since October is impinging positively on the growth prospects of countries

such as Chile which import most of the energy they consume, but extremely negatively on

the activity and the external and fiscal position of some of the region’s main oil exporters

(see Box 1). In a positive light, the exchange rate depreciation, insofar as it does not pass

through to inflation, will foreseeably allow external demand to make a greater contribution

to growth in 2015.

Specifically, the pace of change of activity in the region slowed further in 2014, since GDP

grew by 1.3% in the year as a whole, 1.3 percentage points (pp) less than in 2013. The

regional average for 2014 H2 indicates that growth stabilised at very low rates under 0.5%

in quarter-on-quarter terms (see Chart 5). Thus the year-on-year GDP growth rates of the

six main economies (excluding Venezuela, because its Q4 figure has not yet been released)

went from 0.9% year-on-year in Q3 to 1.1% in Q4 (see Table 1). These low growth rates

are largely explained by the marked weakness of the Brazilian economy, whose GDP fell in

year-on-year terms by 0.6% in Q3 (revised down from the initial figure) and by 0.2% in Q4.

For its part, Venezuela underwent a contraction in activity of nearly 3% in the year, albeit

with an upward pattern throughout. The rest of the region exhibited uneven trends: Mexico

Activity and demand

BANCO DE ESPAÑA 8 ECONOMIC BULLETIN, APRIL 2015 SITUATION OF AND OUTLOOK FOR THE GLOBAL ECONOMY AT THE START OF 2015

Oil prices, which had shown a certain stability on international

markets until mid-2014, began to fall in July, collapsing as from

October. Specifically, the price of a barrel of West Texas Intermediate

(WTI) – the benchmark for Latin American oil exporters – fell from

$90 per barrel in September to $44 in mid-January 2015, although

it has recently rebounded to over $55.1 The impact on Latin America

of this shock differs greatly from country to country, given that

some economies import practically all the oil they consume (such

as Chile and some of the Central American countries), and in others

oil is an export product (in the case of Venezuela, almost the

only export good) and a source of substantial tax revenues. For

the former, the decline in oil prices is a positive supply-side shock

that raises agents’ purchasing power and generates gains in

competitiveness, as it lowers output costs; moreover, by reducing

expenditure abroad, the trade balance improves. For the latter, in

contrast, a reduction in foreign revenues ensues and, therefore, a

deterioration in the trade balance, with consequences for

disposable income and also for public finances.

This Box analyses the effects of the decline in oil prices in three of

the region’s main oil exporting countries: Colombia, Mexico and

Venezuela. Although in the three instances the impact is adverse,

there are highly significant differences between them. Firstly,

because the predominant transmission channel is different:

Colombia is chiefly affected by the trade channel, Mexico by the

impact of tax revenues and Venezuela by both (see Panel 1).

Secondly, because during the commodity boom years the reaction

of the local oil industry and of the economy as a whole was

different: in Colombia, the oil sector gradually gained in importance,

to the extent that it now accounts for 5% of GDP; by contrast, in

Mexico, where the economy is more diversified, the weight of the

oil industry has systematically diminished, now also representing

5% of GDP; lastly, in Venezuelan the oil industry is strategic (11%

of GDP), but output has stagnated in the last six years. Thirdly,

because the current macroeconomic situation and, therefore,

economic policy leeway differ greatly.

A first sign of the scale of these effects is discernible in the downward

revision of the expected GDP growth in these three countries.

Indeed, an increase in activity of 3.6% is expected for Colombia in

2015, compared with 4.8% in 2014; in Venezuela a contraction of

7% is anticipated; and in Mexico’s case the expectations of a boost

to medium-term growth induced by the energy reform approved

some months ago have eased most appreciably.

BOX 1 THE IMPACT OF THE DECLINE IN OIL PRICES ON THE LATIN AMERICAN OIL EXPORTING ECONOMIES

SOURCE: National statistics.

a Crude oil sale price of Ecopetrol.

CountryProduction

(bn bpd)Average oil price

2014 Q4 ($)% of exports % of tax revenue % of GDP

Mexico 2.2 66.3 11 30 5

Colombia 1.0 62.9 (a) 53 20 5

Venezuela 2.4 64.5 96 47 11

1 WEIGHT OF THE OIL SECTOR IN THE ECONOMY

SOURCES: National statistics and IMF.

a Estimated from 2011 central government data.

CountryFiscal balanceas % of GDP

Current account balance

as % of GDP

Reservesas % of GDP

Fiscal rule(year of

application)

Oilstabilisation fund,

as % of GDP

Mexico -3.2 -2.1 15 2014 0.3

Colombia -2.4 -4.2 13 2014 0.2

Venezuela (a) -14.9 +2.9 6 — —

2 MACROECONOMIC SITUATION AND POLICY ROOM FOR MANOEUVRE

1 Levels of $50 per barrel of West Texas intermediate (WTI) entail a 60% decline from the 2008 peak. However, it should be borne in mind that each country has its own price for the crude it exports, which will depend on its quality, transport costs, etc. For example, the Venezuelan mix has a price close to 10% below WTI; however, its rate of change is very similar to that of WTI.

BANCO DE ESPAÑA 9 ECONOMIC BULLETIN, APRIL 2015 SITUATION OF AND OUTLOOK FOR THE GLOBAL ECONOMY AT THE START OF 2015

In a more detailed analysis, the biggest effect through the trade

channel2 is seen in Venezuela, where a 10% decline in oil prices

would entail a 6% drop in exports and a cut in the current surplus

of 0.5% of GDP. Hence, the decline in oil prices since October

would be on a sufficient scale to wipe out the current account

surplus which the country ran before the shock (3% of GDP) and

was considered the country’s main strength; however, the sharp

contraction in imports, whose volume has fallen by almost 25% in

the past two years, has acted as a counterweight. In Colombia, the

trade balance worsened considerably, by more than 2 pp of GDP,

taking the current deficit to a 15-year high (-4.2% of GDP). Lastly,

the importance of this channel in Mexico is more limited, given

that a 10% decline in the price of the Mexican mix accounts for

only a 0.9% drop in exports. Nonetheless, the biggest risk

associated with the decline in oil prices would stem from potentially

lower foreign investment inflows under the energy reform launched

last year, although certain amendments to the reform (tendering of

shallow-water instead of deepwater areas) do try to increase the

attractiveness for potential investors.

The impact of the fall in oil prices on the fiscal position of these

countries depends not only on the change in price, but also on

output, on the weight of oil revenues in total public revenues (see

Panel 2) and on the exchange rate at which crude export revenues

are converted into local currency.3 Thus, the depreciation of the

exporting countries’ currencies against the dollar, which usually

accompanies a decline in oil prices, partly mitigates the fall in oil

revenues when these are recorded in the domestic currency. In

this respect, Mexico and Colombia have flexible exchange rates

– albeit with intervention rules – that have depreciated by 15% and

25%, respectively, since October. Venezuela’s case is more

complex, since there is a system of multiple exchange rates with

an extremely overvalued official exchange rate, used, until some

months back, to value oil-related tax revenues.

Bearing this in mind, in Colombia’s case estimates suggest that

the fall in prices recorded since June would have reduced oil tax

revenues by at least 10%4 in 2014, and the Government estimates

an additional reduction of 60% in 2015, which would lead to a

10% fall in tax revenues in the current year. In Mexico, the same

decline in oil prices since June has reduced oil-related tax

revenues by 42%, and total revenues by 13% in 2014. In the case

of Venezuela, the impact of lower oil prices on the fiscal position is

much more complicated to estimate, given the lack of official

figures.5 In 2013, the latest year for which figures are available, oil

revenues accounted for 46.6% of total central government

revenues. These oil revenues, measured in nominal terms and in

local currency, depend, as indicated earlier, on crude output and

on the international price, and on the exchange rate at which

PDVSA revenue is converted into national currency. Estimating the

effect of these three variables with a very simple regression shows

that the decline in oil prices since June would have given rise to a

reduction in oil revenues potentially amounting to 45%, which

would lead to a decline in total revenues of 21% in 2014.

The pass-through this decline in revenues to the budget deficit is

not immediate, since it depends, in the first two cases, on the

fiscal rules recently approved or amended, and on various

mechanism set in place to insulate the public sector from the

vagaries of oil prices. In fact, such mechanisms were introduced in

Colombia and Mexico in 2011 and in 2013 (although both came

into force in 2014), respectively. They envisage the accumulation

of oil revenues in a sovereign wealth fund subject to specific rules,

relating essentially to expected oil prices in the long run and

potential output.6 The little time both systems have been in force

has limited their ability to smooth fluctuations in public revenues

associated with the recent decline in oil prices. Hence, the

sovereign funds in both countries have built up a relatively small

amount (scarcely 0.2%-0.3% of GDP), although under the escape

clauses, in situations of cyclical weakness, the rule shall not give

rise to a contractionary fiscal policy, which would further

exacerbate such weakness. In Mexico, moreover, an active policy

has been pursued for several years to insulate public finances as

far as possible from changes in oil prices, through taking out a

hedge position in the futures markets. In Venezuela’s case, the

pass-through to the deficit is complicated, as only central

government figures are available, to which should be added the

effect on the other tiers of government whose revenues depend to

a greater or lesser extent on oil, such as PDVSA and the various

investment funds. In any event, the fall in prices has a bearing on

what is already a very weak fiscal position, which the IMF quantifies

as an overall general government deficit of 15% of GDP, and

without any prior saving mechanisms.

BOX 1 THE IMPACT OF THE DECLINE IN OIL PRICES ON THE LATIN AMERICAN OIL EXPORTING ECONOMIES (cont’d)

2 In the trade channel only price effects are considered, since in the short term oil is difficult to replace with other products.

3 In the case of Venezuela it should be borne in mind, moreover, that the country has entered into several association agreements with Central American and Caribbean countries, and with China. These agreements envisage lower-than-market prices. Finally, another factor to be taken into account would be each country’s commodity exploitation market structure, and here the range is from State monopolies that transfer dividends to the Treasury (Mexico), through exploitation with strict rules to ensure most of the revenues for the State oil company (Venezuela) to more open markets with State investment that provides dividends to the State and foreign investment that pays specific royalties for operating in the country.

4 This amount includes only the withholding at source of the value of oil exports, in the absence of the figures on Ecopetrol dividends and other taxes on the oil sector.

5 The uncertainty over tax figures in Venezuela is very high, since the Ministry of Finance does not publish data for the whole of the public sector and for central government beyond 2011 and after 2013, respectively, when much of public spending in recent years has been by the State oil company PDVSA and the group of investment funds present in the country. Accordingly, the figures in this Box should be viewed with great caution.

6 For greater details on the Colombian rule, see J.C.Berganza (2012), Fiscal rules in Latin America: a survey, Documentos Ocasionales, No. 1208, Banco de España; and on the Mexican rule, the Box on structural reforms in Mexico in the Report on the Latin American economy. Second half of 2014, Economic Bulletin, Banco de España, October 2014.


showed somewhat greater dynamism (with year-on-year growth of 2.2% in Q3 and 2.6%

in Q4), Colombia and Peru saw a certain additional slowdown, and Chile an incipient

recovery in the last quarter, although from very low growth rates (see Chart 5).

By component, the regional average data show that domestic demand contributed only

0.4 pp to year-on-year growth in Q3, although the contribution amounted to 0.9 pp in Q4

(see Chart 6), while foreign demand contributed around 0.2 pp in Q4 compared with 0.5 pp

in Q3. This lower contribution stemmed from a fall in exports (-1.8% at regional level),

which was partially offset by the fall in imports (-0.9%). The divergence between the

behaviour of exports in Brazil, with a year-on-year fall of 10.7% in Q4, and Mexico, with an

increase of more than 10% year-on-year in Q4, reveals, among other things, the different

growth prospects in their main trading partners (upward in the United States and downward

in China). On the negative side, Colombia recorded a fall of 2% in its exports in Q4, owing

to the slump in the price of its main export.

Gross fixed capital formation contributed negatively to growth, although in Q3 and Q4 it

showed a certain recovery. However, in this component there were growing differences

across countries. In Mexico, the growth rate rose significantly thanks to its private

component (9.9% year-on-year in Q4), perhaps partly associated with the structural

reforms and with the vigorous foreign demand from the United States. In Chile, where the

uncertainty stemming from the approval of the tax reform dissipated, the adjustment of the


a Latin America 6 as a GDP-weighted average for the region.

LATIN AMERICAN GDP Year-on-year and quarter-on-quarter rates

CHART 5

-8

-4

0

4

8

12

16

2008 2009 2010 2011 2012 2013 2014

ARGENTINA BRAZIL VENEZUELA LATIN AMERICA (a)

GROSS DOMESTIC PRODUCT Year-on-year rate

%

-9

-6

-3

0

3

6

9

12

2008 2009 2010 2011 2012 2013 2014

CHILE COLOMBIA PERU MEXICO

GROSS DOMESTIC PRODUCT Year-on-year rate

%

-3

-2

-1

0

1

2

3

2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014

Mexico Brazil Argentina Latin America (a)

%

GROSS DOMESTIC PRODUCT Quarter-on-quarter rate



a Latin America 6: all the countries represented, except Venezuela; Latin America 5: all the countries represented, except Argentina and Venezuela.b Seasonally adjusted.c 2014 inflation is calculated as the cumulative figure since December 2013.d Four-quarter moving average.

2015

Q1 Q2 Q3 Q4 Q1 Q1 Q3 Q4 March

GDP (year-on-year rate)

Latin America 6 (a) 2.7 1.3 2.2 3.7 2.9 2.4 2.7 0.6 0.9 1.1

Argentina 2.9 0.5 1.3 5.2 3.3 1.7 0.8 0.7 0.0 0.4

Brazil 2.7 0.1 2.6 3.9 2.4 2.1 2.7 -1.2 -0.6 -0.2

Mexico 1.4 2.1 1.0 1.8 1.6 1.1 2.0 1.6 2.2 2.6

Chile 4.2 1.9 5.4 4.0 4.8 2.8 2.7 2.1 1.0 1.8

Colombia (b) 4.9 4.6 2.8 4.7 6.1 6.1 6.4 4.3 4.2 3.5

Venezuela 1.3 0.8 2.6 1.1 1.0 -4.8 -5.0 -2.3

Peru 5.8 2.4 4.4 6.2 5.2 7.2 5.0 1.8 1.8 1.1

CPI (year-on-year rate)

Latin America 5 (a) 4.6 5.0 4.5 4.9 4.4 4.4 4.7 4.9 5.1 5.2 5.7

Argentina (c) 10.6 22.6 10.8 10.4 10.5 10.7 6.9 13.5 18.2 22.6 —

Brazil 6.2 6.3 6.4 6.6 6.1 5.8 5.8 6.4 6.6 6.5 8.1

Mexico 3.8 4.0 3.7 4.5 3.4 3.7 4.2 3.6 4.1 4.2 3.1

Chile 2.1 4.4 1.7 1.9 2.3 2.5 3.2 4.5 4.7 5.3 4.2

Colombia 2.0 2.9 1.9 2.1 2.3 1.8 2.3 2.8 2.9 3.5 4.6

Venezuela 38.5 57.3 22.6 33.0 43.4 52.9 53.3 55.6 57.5 61.3 —

Peru 2.8 3.2 2.6 2.5 3.1 3.0 3.4 3.5 2.9 3.2 3.0

Budget balance (% of GDP) (d)

Latin America 6 (a) -2.4 -4.0 -2.1 -2.2 -2.5 -2.4 -2.6 -3.0 -3.6 -4.2

Argentina -1.9 -2.5 -1.9 -1.8 -1.8 -1.8 -2.0 -2.0 -2.1 -2.3

Brazil -3.3 -6.7 -2.8 -2.8 -3.3 -3.3 -3.2 -3.7 -4.9 -6.7

Mexico -2.3 -3.2 -2.0 -2.2 -2.8 -2.3 -2.8 -3.2 -3.4 -3.1

Chile -0.7 -1.5 0.2 -0.7 -0.5 -0.7 -1.0 -0.8 -1.1 -1.2

Colombia -2.2 -2.6 -1.4 -2.5 -2.7 -2.2 -2.7 -3.6 -3.4 -2.6

Venezuela — — — — — — — — — —

Peru 0.5 -0.4 1.2 0.7 0.5 0.5 0.4 0.0 0.1 -0.4

Public debt (% of GDP)

Latin America 6 (a) 40.1 41.4 40.1 40.2 38.6 41.3 41.8

Argentina 32.6 32.1 31.7 32.5 33.2 37.9 36.1

Brazil 56.7 63.5 59.4 59.0 58.2 56.7 57.5 59.0 61.9 63.5

Mexico 31.1 33.4 29.3 29.7 30.3 29.9 31.8 32.0 32.9 32.0

Chile 12.8 15.1 11.5 12.1 12.6 12.8 12.8 13.5 13.7 15.1

Colombia 34.6 37.7 33.0 33.3 34.9 34.6 35.9 35.0 35.6 37.7

Venezuela — — — — — — — — — —

Peru 19.0 19.4 19.5 18.5 17.7 19.0 17.8 18.2 18.4 19.4

Current account balance (% of GDP) (d)

Latin America 7 -2.5 -2.1 -2.3 -2.6 -2.6 -2.7 -2.7 -2.6

Argentina -0.8 -1.4 -0.3 -0.3 -0.6 -0.7 -1.2 -1.1 -0.9 -0.9

Brazil -3.4 -3.9 -2.8 -3.0 -3.4 -3.4 -3.5 -3.5 -3.5 -3.9

Mexico -2.4 -2.1 -1.6 -2.0 -2.3 -2.3 -2.6 -2.5 -2.3 -2.1

Chile -3.7 -1.2 -4.2 -4.2 -3.8 -3.7 -3.2 -2.7 -1.8 -1.2

Colombia -3.2 -5.2 -3.5 -3.2 -3.2 -3.2 -3.5 -4.0 -4.3 -5.2

Venezuela 2.3 — 1.4 0.9 1.2 1.5 2.8 2.9 2.2 —

Peru -4.4 -4.1 -3.6 -3.9 -4.3 -4.4 -4.2 -4.4 -3.8 -4.1

External debt (% of GDP)

Latin America 7 22.6 20.0 19.6 19.8 20.4 23.5 24.0 24.2

Argentina 22.6 25.8 23.0 21.7 22.9 21.8 28.6 26.6 26.6 25.8

Brazil 13.8 14.8 14.6 14.1 13.7 13.8 13.6 14.3 14.2 14.8

Mexico 20.1 21.8 19.1 18.7 19.3 20.6 20.8 21.1 21.0 21.8

Chile 47.3 56.8 43.5 42.9 44.4 47.2 48.7 50.4 52.3 56.8

Colombia 24.2 26.8 21.5 22.0 23.7 24.2 25.0 25.6 26.1 26.8

Venezuela 56.1 43.4 46.1 49.6 56.1 58.1 59.2 61.7

Peru 29.2 31.7 30.5 29.6 29.3 29.3 30.1 30.5 31.1 31.7

201420132013 2014

LATIN AMERICA: MAIN ECONOMIC INDICATORS TABLE 1

investment cycle over the last two years seems to be coming to an end and investment

went from falling at rates above 12% to rising at 0.5% year-on-year in Q4. In Colombia,

investment slowed moderately in Q4 as a result of the adjustment in the construction and

infrastructure sector, and to a lesser extent in the oil sector, but even so it continued to be


the fastest-growing component of demand. By contrast, in Brazil investment dropped

sharply in H2 (-6.1% on average), against a background of falling business confidence

indicators which did not regain ground after the elections. Both the announcement of a

procyclical economic policy adjustment and the uncertain extent of the impact of factors


a Latin America 6 as a GDP-weighted average for the region.

-15

-10

-5

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014


CHILE LATIN AMERICA (a)

GROSS FIXED CAPITAL FORMATION

% y-o-y

-4

0

4

8

12

2010 2011 2012 2013 2014

EXTERNAL DEMAND GOVERNMENT CONSUMPTION PRIVATE CONSUMPTION GROSS FIXED CAPITAL FORMATION STOCKBUILDING GDP

CONTRIBUTIONS TO YEAR-ON-YEAR GDP GROWTH (a)

pp

- 3

0

3

6

9

12

15

2010 2011 2012 2013 2014

ARGENTINA BRAZIL MEXICO CHILE LATIN AMERICA (a)

PRIVATE CONSUMPTION

% y-o-y

COMPOSITION OF GDP ON THE DEMAND SIDE Year-on-year rate and pp

CHART 6

-20

-10

0

10

20

30

2010 2011 2012 2013 2014



EXPORTS

% y-o-y

- 4

0

4

8

12

16

2010 2011 2012 2013 2014



GOVERNMENT CONSUMPTION

% y-o-y

-20

-10

0

10

20

30

40

50

2010 2011 2012 2013 2014



IMPORTS

% y-o-y


such as the corruption scandals in the state oil company Petrobras seem to be behind this

performance. In Argentina and Venezuela the import restrictions gave rise to sharp falls in

investment, in machinery and equipment in the former and in construction in the latter.

The behaviour of private consumption over the six-month period was, by contrast,

somewhat more uniform across the region. On average in Latin America private

consumption continued to slow, posting a growth rate near to 1.5% in 2014 as a whole

(compared with 3% in 2013), although recovering somewhat in Q4 (1.8%, compared with

1.2% previously). Brazil, Chile, Argentina and Venezuela all recorded low or even negative

growth rates in H2, while in Colombia and Peru consumption continued to show its

robustness. In Mexico, consumption recovered towards the end of the year, posting a rate

of 2.7% year-on-year. The general situation of most labour markets remained healthy, as

evidenced by unemployment rates near their historical lows (5.4% of the labour force in

the region on average at end-2014). However, job creation generally showed signs of

weakness and fell, in line with previous quarters, to rates below 1% (see Chart 7). Some

countries, such as Brazil, saw jobs destroyed in the six-month period. In Mexico, by

SOURCES: National statistics and Datastream.

a Aggregate of Argentina, Brazil, Chile, Mexico and Peru. b Aggregate of Brazil, Chile, Mexico and Peru.c Aggregate of Brazil, Chile, Colombia, Mexico, Peru and Venezuela.d Aggregate of Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. e Aggregate of Brazil, Chile, Colombia and Mexico.f Aggregate of Brazil, Chile, Colombia, Mexico and Peru.

FUENTES: Bloomberg,

80

85

90

95

100

105

2011 2012 2013 2014 2015

CONSUMER CONFIDENCE (a)

BUSINESS CONFIDENCE (b)

CONSUMER AND BUSINESS CONFIDENCE INDICES

2011 = 100

0

5

10

15

20

25

30

2011 2012 2013 2014

BRAZIL MEXICO CHILE

COLOMBIA LATIN AMERICA (c)

REAL CHANGE IN CREDIT TO THE PRIVATE SECTOR

% y-o-y

EMPLOYMENT, DEMAND AND CREDIT INDICATORS Year-on-year rate, indices and three-month moving average of the year-on-year

CHART 7

-2

0

2

4

6

8

2011 2012 2013 2014 2015


CHILE LATIN AMERICA (d)

JOB CREATION

% y-o-y, three-month moving average

-4

-2

0

2

4

6

8

10

2011 2012 2013 2014 2015

RETAIL SALES (e)

INDUSTRIAL PRODUCTION (f)

DEMAND AND ACTIVITY INDICATORS

% y-o-y, three-month moving average


contrast, job creation in the formal sector strengthened considerably, and simultaneously

informal employment decreased. Real wages buoyed up consumption, since they grew in

most countries; in some cases (such as Brazil) unemployment transfers and support for

low income households also increased significantly; in turn, lending to the private sector

slowed (in Brazil, in the sectors most closely linked to private consumption, such as credit

cards) (see Chart 7). Finally, it should be noted that government consumption lent some

momentum to growth in Brazil and Chile and in the more vulnerable countries (see Chart 6).

The trade surplus of the region decreased by 0.2 pp of GDP to 2014 Q3 (see Chart 8),

owing to the smaller surplus of Venezuela. Excluding that country, the region’s trade

account remained virtually in balance until Q3 (+0.1% of GDP), although in 2014 Q4 and

the opening months of 2015 it showed a deficit, owing to the behaviour of nominal exports,

which fell in the regional aggregate by nearly 10% year-on-year (see Chart 8). This fall was

attributable to the oil price slump, but also to the contraction in exports to China (particularly

those of Brazil), which was barely offset by an increase in exports to the United States. The

current account deficit held steady at around 3% of GDP in regional average terms, owing

SOURCES: Datastream, national statistics and central banks.

a Customs data in dollars. b Latin America 6.c Four-quarter moving average.d Estimate of adjusted balances, setting export and import prices as the average from 1990 to 2007. In the cases of Chile and Peru, a fixed level in the income

balance has been estimated as a percentage of GDP.

EXTERNAL ACCOUNTS AND DETERMINANTS Indices, year-on-year rates of change, percentage of GDP and $bn

CHART 8

-50

-40

-30

-20

-10

0

10

2010 2011 2012 2013 2014

BRAZIL ARGENTINA PERU MEXICO CHILE COLOMBIA VENEZUELA LATIN AMERICA

$bn (c)

CURRENT ACCOUNT BALANCE

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

-20

-10

0

10

20

30

40

50

2010 2011 2012 2013 2014 2015

TRADE BALANCE AGGREGATE 6 (b) (right-hand scale) TRADE BALANCE VENEZUELA (right-hand scale) EXPORTS IMPORTS

EXPORTS AND IMPORTS (a)

% y-o-y, 3-month moving average % of GDP

40

60

80

100

120

140

160

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

AGGREGATE FOOD

ENERGY METALS

COMMODITY PRICES

January 2010 = 100

-8

-6

-4

-2

0

2

4

2001 2003 2005 2007 2009 2011 2013

REGISTERED CURRENT ACCOUNT BALANCE ADJUSTED CURRENT ACCOUNT BALANCE

REGISTERED AND ADJUSTED EXTERNAL BALANCES (d)

% of GDP


to a slight improvement in the income balance (associated with lower profit repatriation by

foreign firms in the commodities sector) and an increase in transfers received. By country,

the deficit decreased slightly in Mexico and Peru and, above all, in Chile, but worsened in

the rest. The recent decline in the terms of trade narrowed the difference between the

region’s current account balance and the current account balance adjusted for the change

in terms of trade (see Chart 8).

Finally, the most frequent indicators for 2015 Q1 suggest that the aforementioned intra-

regional divergences remain. Thus, industrial output posted rates of change around -2%,

as a result of developments in Brazil, Chile, Argentina and Peru, while in Colombia and

Mexico the rates remained positive. Retail sales rose strongly in Mexico and Colombia,

while they decelerated in Brazil. In the countries for which PMI indices are published, the

trends in Q1 are upward, except for Brazil, albeit starting from levels that are still very low

compared with the historical average.

In the past six months, since the publication of the previous Report on the Latin American

Economy, inflation in the five countries with inflation targets steadied, on average, at relatively

high levels, standing at 5.7% year-on-year in March 2015 (see Chart 9). In fact, at end-2014,

only in Colombia and Brazil had consumer prices remained within, albeit towards the top of,

the band set by their central banks (see Table 2). The regional average masks, however, an

increase in the divergences across countries with respect to the first half of 2014.

In Brazil, inflation rebounded in March to 8.1% year-on-year, the highest level in the last

ten years and more than 1.5 pp above the upper bound of the range. Part of this increase

is a result of rises in some administered prices (which increased by 13.3% year-on-year in

March) against a background of fiscal adjustment, and the impact is, in principle, temporary.

However, the various inflation components continued to evidence pressures to a greater or

lesser degree, since the core rate stood at 8% year-on-year and the rate of change in non-

tradable goods prices at 7.5% and in the price of services (excluding those with regulated

prices) at 6.1%. Thus only tradable goods showed a certain moderation in 2014 H2, to

5.7% year-on-year in March. This is particularly noteworthy because it took place against

a background of sharp exchange rate depreciation, a symptom of weak domestic demand.

In the other countries with inflation targets, the general trend was one of either deceleration

or stabilisation. In the former case are Mexico (3.1% year-on-year in March) and Peru (3%

year-on-year), with inflation at the central bank’s target and no evidence of pass-through of

exchange rate depreciation. In Chile and Colombia inflation remained at the top of the target

range, at 4.2% and 4.6% year-on-year, respectively, in March, evidencing the effect of

exchange rate depreciation. In both cases, part of the pressure on prices has passed through

to core inflation, although medium-term inflation expectations remain anchored. The impact

of the oil price slump on inflation was noticeable especially in oil importing countries such as

Chile, Peru and, to a certain extent, in Argentina also. In Argentina, Colombia, Mexico and

Brazil petrol prices are administered (and subsidised) and the final impact on consumer prices

is smaller (see Chart 9). Argentina and Venezuela continued to post very high inflation rates,

above 20% and 60% year-on-year, respectively, against a background of monetary financing

of the budget deficit, although inflation moderated somewhat in Argentina in early 2015

against a backdrop of standstill in activity, exchange rate stability and falling oil prices.

In this setting, the divergences observed in monetary policies in 2014 H1 increased (see

Chart 9). The central bank of Brazil (which in April had halted the upward interest rate

cycle) intensified its monetary policy tightening after the October presidential election in

Prices and economic policies


order to lend more credibility to the inflation target (4.5%). The rise of 125 bp to 12.75% in

the official interest rate, on top of the previous rise of 375 bp, makes the monetary

adjustment strongly procyclical in the short run. Despite this, the exchange rate has

continued to depreciate (reaching 3.3 reais per dollar), making a cumulative depreciation

of 30% in the past year and of more than 50% since the beginning of 2011, contained by

the central bank’s exchange rate intervention programme. Also, the government announced

SOURCES: Datastream and national statistics.

a Aggregate of Brazil, Chile, Colombia, Mexico and Peru as a GDP-weighted average for the region.b Banco de España calculations stripping out the food and energy indices from the overall index.

0

2

4

6

8

10

12

14

2011 2012 2013 2014

BRAZIL MEXICO CHILE

COLOMBIA PERU LATIN AMERICA (a)

OFFICIAL INTEREST RATES

%

0

10

20

30

40

50

60

70

0

2

4

6

8

10

12

14

2011 2012 2013 2014

BRAZIL MEXICO CHILE LATIN AMERICA (a) VENEZUELA (right-hand scale)

INFLATION RATE

% y-o-y

INFLATION AND OFFICIAL INTEREST RATES Year-on-year rates of change and percentage

CHART 9

1

2

3

4

5

6

7

2011 2012 2013 2014 2015

BRAZIL MEXICO CHILE

COLOMBIA PERU

12-MONTH INFLATION EXPECTATIONS

% y-o-y

0

2

4

6

8

2011 2012 2013 2014

BRAZIL MEXICO


CORE INFLATION RATE

% y-o-y

0

1

2

3

4

5

6

7

2008 2009 2010 2011 2012 2013 2014 2015

OTHER FOOD ENERGY

CONTRIBUTION TO INFLATION IN LATIN AMERICA (a) (b)

%


cuts in the state funding to public development banks (whose loan market share has

reached 50%) and two increases in the lending rates of those banks (to 6%).

In the other countries with inflation targets, Mexico and Colombia held their official interest

rates unchanged in the past six months, while the central bank of Chile trimmed its official

interest rate by 25 bp to 3% in October and the central bank of Peru did so twice, by 50 bp

each time, to 3.25%. Both in Mexico and, above all, in Chile and Peru, monetary policies

have been expansionary over the past year and a half, and only in Colombia, which ended

its upward interest rate cycle in mid-2014, has monetary policy been more neutral.

Interestingly, in all four countries the projections are for inflation to decrease or at least

steady in 2015, and yet while in Colombia and Peru the markets are factoring in the

possibility of new interest rate cuts (more likely if stable terms of trade were to halt the

exchange rate depreciation), in Mexico the market is discounting an interest rate rise in

accordance with the US monetary cycle. In Chile expectations have changed in the past

month and no longer discount official interest rate cuts.

Exchange rate depreciation has been an important factor for monetary policy in most

countries, since although attempts have been made to help real exchange rates adjust to

lower terms of trade, Peru and, recently, Mexico have intervened in the foreign exchange

market, selling reserves to smooth these trends, and Colombia has completely discontinued

its reserve accumulation programme. In addition, Peru has used macroprudential policy to

reduce its vulnerability to depreciation of the sol (making debt denominated in foreign

currency more expensive than that denominated in national currency).

Meanwhile, in the fiscal policy arena, the end of 2014 saw, practically without exception,

an across-the-board widening of budget deficits (or, in the case of Peru, the evaporation

of the budget surplus) (see Chart 10). This was mainly a result of the poor revenue

performance owing to the cyclical position and the fall in commodities-related receipts,

although in some countries it was also a result of expanded government spending, which

helped to sustain household income and private consumption. In Brazil the deficit widened

substantially in 2014 to 7% of GDP, and with a view to 2015, despite the political difficulties,

the authorities are trying to implement a fiscal adjustment, which will have procyclical

effects in the short term but which is necessary to put public finances back on a firm

footing and strengthen their credibility in the medium term. In the other countries the fiscal

worsening in 2014 was less pronounced. For 2015, in Mexico, Colombia, Peru and Chile

the existence of fiscal rules should bestow a countercyclical or acyclical nature on fiscal

policy, thereby isolating to some extent the fiscal accounts from commodity price fluctuations

SOURCES: National statistics and Consensus Forecasts.

a March 2015 Consensus Forecast for the end of the year.

Country Target December Fulfillment March Expectations (a) Expectations (a)

Brazil 4.5 ± 2 6.4 Yes 8.1 7.7 5.5

Mexico 3 ± 1 4.1 No 3.1 3.1 3.4

Chile 3 ± 1 4.6 No 4.2 3.0 3.0

Colombia 3 ± 1 3.7 Yes 4.6 3.5 3.1

Peru 2 ± 1 3.2 No 3.0 2.6 2.6

2014 2015 2016

INFLATION Year-on-year rates of change

TABLE 2


(see Box 2). Even so, the responses differ. In Colombia and Peru the fiscal rule, the

stabilisation funds, and, above all, the low level of government debt have prevented a

procyclical adjustment (additional to that envisaged in medium-term consolidation plans)

despite the fall in oil, copper and other metal prices. In Chile fiscal policy is determined,

firstly, by the tax rise under the recently approved tax reform, and secondly, by the desire

to carry out an expansion to counteract the fall in growth, with a sharp increase in this

year’s investment budget. Also, the projected deficit has been relaxed to -1.9% of GDP,

although the target is still to reach a balanced budget (in terms of the cyclically-adjusted

balance) in 2018. Mexico has announced an expenditure adjustment for both 2015 and

2016, against a background of falling oil prices and falling oil production, as a signal to the

markets that the risk that a part of the oil slump may be permanent will not induce it to

resort to greater indebtedness in a situation of change in the global financial cycle.

Over the period analysed, headway was made in trade liberalisation, both globally, with the

signing of the Trade Facilitation Agreement that re-opens the Doha Round negotiations, and

regionally, with renewed momentum in the area of influence of the Pacific Alliance. Thus,

progress was made at different levels (start of conversations, completion of parliamentary

Trade and reforms


a Aggregate of the seven main economies, as a GDP-weighted average of the region.b In Venezuela, 2012 quarterly data estimated from annual data. In 2013 and 2014 aggregate excluding Venezuela.c Latin America 5.d Latin America 6.

-5

-4

-3

-2

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 (b) 2013 (b) 2014 (b)

TOTAL BALANCE PRIMARY BALANCE

BUDGET SURPLUS (+) OR DEFICIT (–) IN LATIN AMERICA (a)

% of GDP

MAIN PUBLIC SECTOR FIGURES Percentage of GDP and index

CHART 10

0

10

20

30

40

50

60

70

80

Argentina Brazil Chile Colombia Mexico Peru Venezuela

AVERAGE 1990s 2000 2008

2014 (ESTIMATE)

% of GDP

GROSS PUBLIC DEBT

95

105

115

125

135

145

155

2008 2009 2010 2011 2012 2013 2014

REAL REVENUE REAL PRIMARY EXPENDITURE

REAL PRIMARY REVENUE AND EXPENDITURE IN LATIN AMERICA (c)

2008 Q1 = 100. Four-quarter moving average

214%

0

1

2

3

4

5

6

7

2008 2009 2010 2011 2012 2013 2014

BRAZIL MEXICO LATIN AMERICA (d)

PUBLIC DEBT INTEREST EXPENSE AS A PROPORTION OF GDP

% of GDP


The use of fiscal policy as a business cycle smoothing tool represents a historical challenge in Latin America. In the empirical literature, fiscal policy has systematically been found to behave procyclically for Latin America (i.e. the application of an expansionary fiscal policy when the cycle is buoyant and a contractionary policy when the economy is in recession), as occurs in other emerging economies. The intensity of the procyclical bias is exacerbated in Latin America by the relative insubstantiality of the automatic stabilisers, low revenue-raising capacity and the dependence of public revenues on commodities exports, and also by external financial conditions that amplify economic fluctuations. In particular, the high dependence of

the Latin American countries on external financing and episodes of sudden stops in capital inflows, against a backdrop of exchange rate rigidities, have traditionally given rise to procyclical fiscal policy responses, especially in downturns.

However, a change in behaviour can be seen in recent years. In particular, during the global financial crisis Latin American economies held up particularly well, with counter-cyclically geared macroeconomic policies to alleviate the effects of the crisis. Moreover, a significant institutional change in budgetary terms was observed from the onset of the new millennium, in the form of the implementation of a more

BOX 2FISCAL POLICY IN LATIN AMERICA IN THE FACE OF THE CHANGE IN FINANCIAL CONDITIONS

AND THE APPLICATION OF FISCAL RULES

SOURCES: IMF Fiscal Rules Dataset, CEPAL, OECD and Banco de España.

a Output gap coefficient in a MCO regression with a 7-year rolling window and a 90% confidence interval. A negative (positive) coefficient denotes a procyclical (counter-cyclical) fiscal policy.

0

2

4

6

8

10

1998 2000 2002 2004 2006 2008 2010 2012

1 NUMBER OF COUNTRIES WITH FISCAL RULES IN LATIN AMERICA

-0.04

-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

OUTOPUT GAP CHANGE IN STRUCTURAL PRIMARY BALANCE

2 OUTPUT GAP AND STRUCTURAL PRIMARY BALANCE

pp %

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

3 COEFFICIENT OF FISCAL POLICY REACTION TO THE ECONOMIC CYCLE (a)

-0.50 -0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 0.40 0.50

No controls Financing conditions

4 COEFFICIENT OF FISCAL POLICY REACTION TO THE ECONOMIC CYCLE, BY DETERMINANT

ALL COUNTRIES COUNTRIES WITHOUT FISCAL RULE

COUNTRIES WITH FISCAL RULE

-0.50 -0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 0.40 0.50

-0.50 -0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 0.40 0.50

No controls Financing conditions No controls Financing conditions


robust fiscal framework involving the adoption of rules in many countries in the region (see Panel 1). These fiscal rules have been developed with various aims. In some countries they seek to restrict the growth of debt or the primary deficit in order to enhance the sustainability of public finances in the medium and long term, while in others the aim is the stabilisation of the cycle and the generation of fiscal space in upturns so as to be able to undertake fiscal expansions in recessive times. The creation of sovereign funds drawing on commodities revenues in Chile, and more recently in Colombia and Mexico, and the introduction of medium-term structural balance sheet objectives are some of the economic policy developments linked to these fiscal rules.

In order to be able to assess the fiscal policy stance in Latin America, primary structural budget balances (i.e. excluding the interest burden and the impact of the business cycle from the total public balance) must be estimated and adjusted, moreover, for the impact of commodities prices, since many of the region’s countries depend to a greater extent on revenues from primary goods exports to balance their public finances, and their prices also show highly persistent temporary fluctuations. For a sample of eight of the main Latin American economies1 in the period 1990-2013, this Box shows primary structural balances adjusted for the price of commodities – using OECD and IMF methodology2 – and assesses whether the change in external financing conditions, on one hand, and the introduction of fiscal rules, on the other, have provided for a shift towards a fiscal policy able to smooth the business cycle.3

Panel 2 shows the primary structural balance and the output gap in the countries analysed, as an arithmetic mean. As can be seen, counter-cyclical fiscal policy situations are seldom observed in the period in question; i.e. periods in which either a positive output gap (economic expansion) is accompanied by a positive change (restrictive fiscal policy stance) in the primary structural balance, or a negative output gap (economic recession) occurs at the same time as the change in the primary structural balance turns negative (restrictive fiscal policy stance). However, there was a break in this pattern in 2009 due to the major fiscal impulse applied in response to the global financial crisis, and in the years immediately after the crisis there were some improvements in the primary structural balance in favourable economic circumstances. The prevalence of the procyclical fiscal policy stance in the region over the past 25 years is corroborated by a simple econometric analysis, in which the primary structural balance is regressed on the output gap. In fact, Panel 3, which illustrates the changes in the coefficient measuring the cyclical response of fiscal policy in the form of a seven-year moving window together with confidence bands of 90%4, shows that procyclicality in the region was relatively stable

and significant up to the reaction to the 2009 crisis. Following the 2009 fiscal impulse, the coefficient measuring the fiscal policy response to the cycle ceases to be significant, i.e. fiscal policy ceases to be procyclical and becomes acyclical.

To analyse changes in financial conditions in respect of the relationship between the fiscal policy stance and the cycle, the foregoing regression includes an indicator, derived from the literature analysing debt sustainability,5 which seeks to approximate the financial position of the public sector. This indicator is constructed as the primary structural balance that would stabilise the public debt/GDP ratio in each period, given the implied yield paid by the public sector on debt issued6 and the growth of the economy. This variable takes into account financing conditions and the underlying fiscal situation, such that it measures the fiscal space of the authorities.7 The results indicate that financing conditions significantly influence the cyclical response of fiscal policy. As can be seen in Panel 4, the procyclical nature of fiscal policy lessens once the influence of financing conditions is taken into account.

The impact of the introduction of fiscal rules on the fiscal policy response to the cycle is more difficult to evaluate. First, it is not easy to assess whether fiscal rules contribute to eliminating the counter-cyclical bias of fiscal policy or whether, on the contrary, their creation is part of a process in which improved institutions may be a step forward towards achieving fiscal discipline. Further, measurement of the quality of fiscal rules is an open issue. This study uses the IMF database8 to construct different de jure indicators of fiscal rules, without going into an assessment of either their suitability or the de facto compliance with the fiscal rules.9 The primary structural balance regression is estimated once again on the output gap, allowing the coefficient of this latter variable to differ depending on the existence or not of fiscal rules.10 The results show that countries whose fiscal discipline is underpinned by a fiscal rule have been able to make progress towards eliminating the procyclical tendency of fiscal policy (see Panel 4). Whether this behaviour shows that fiscal rules function as a signalling mechanism of a commitment to a more stable fiscal policyremains open to discussion.

BOX 2 FISCAL POLICY IN LATIN AMERICA IN THE FACE OF THE CHANGE IN FINANCIAL CONDITIONS

AND THE APPLICATION OF FISCAL RULES (cont’d)

1 Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay.

2 See Daude, Melguizo and Neut (2011), “Fiscal policy in Latin America: counter-cyclical and sustainable?”, Economics: The Open-Access, Open-Assessment E-Journal, vol. 5, 2011-14.

3 Alberola, Kataryniuk, Melguizo and Orozco (2015), “The long (and unfinished) march towards fiscal policy stabilisation in Latin America: the role of financial conditions and fiscal rules”, mimeo.

4 A negative coefficient in the regression denotes procyclical behaviour of fiscal policy, and vice versa.

5 Alberola and Montero (2006), “Debt Sustainability and Procyclical Fiscal Policies in Latin America”, Economía, LACEA, Journal of the Latin American and Caribbean Association – 7 (1), pp. 157-193, autumn.

6 Specifically, this variable is constructed as follows: TB=[(r-g)/1+g]*D(-1), where r is the average yield effectively paid, g is GDP growth and D(-1) the stock of debt in the previous period.

7 The inclusion of this variable in the regression of the primary structural balance is potentially subject to a problem of endogeneity, since the financing conditions may also depend on the fiscal policy stance. To try and resolve this problem, an instrumental variables estimate is used.

8 IMF Fiscal Rules Dataset. See A. Schaechter, T. Kinda, N. Budhina and A. Weber (2012), Fiscal Rules in Response to the Crisis – Towards the “Next-Generation” Rules. A New Dataset.

9 See J.C. Berganza (2012), Fiscal rules in Latin America: a survey, Documentos Ocasionales, no. 1208, Banco de España.

10 So as to take into account the problem of endogeneity mentioned in footnote 7, an external instrument is used (durability of the political regime, obtained from the Polity IV database, to reflect the broader perspective of macroeconomic stability with a long-term approach by a more stable political regime).


procedures, signing of agreements or entry into force) in the establishment of free trade

agreements by Mexico, Colombia, Chile, Peru and Central America with Asian and European

countries such as Turkey.

In the case of MERCOSUR, some progress was made in opening up towards other areas,

with agreements signed to start negotiations with Lebanon, Tunisia, Russia, Belarus and

Kazakhstan, in addition to South Korea and Pakistan, and ratification of the free trade offer

made to the European Union in mid-2014 covering 90% of trade. Measures were also

adopted to facilitate the free movement of goods and persons within the area, such as an

arrangement to allow Uruguay and Brazil to trade with each other in their local currencies,

further momentum for the Mercosur passport programme and acceleration of the process

of accession for Bolivia. Chile put forward the possibility of the Pacific Alliance moving

closer to MERCOSUR on matters not related to lower tariffs. By contrast, Argentina and

Brazil renewed the restrictions on sales of cars with Mexico for another four years.

Turning to structural reforms, in Mexico new legislative initiatives were enacted to combat

corruption and violence and to boost productivity, increasing integration between the

production chains of SMEs and large corporations and promoting the funding of activities

and projects that entail productive potential or investment in human capital. In addition,

the new regulatory bodies of the various sectors affected by the reforms began to take

shape and the Mexican Oil Fund was established. In Colombia a moderately broad tax

reform was introduced that aims to close the revenue gap in the 2015 budget, raising

income tax and creating a new wealth tax. Lastly, in Chile, an education reform guaranteeing

free schooling and an electoral reform making the voting system more proportional were

passed and it was announced that a labour reform, including measures to facilitate trade

union membership, guarantee the right to strike and changes in employment contracts,

would be put before Parliament before the end of the year.

With the review of the national accounts figures published in March, Brazil’s economy came

out of “technical” recession in 2014 H2, growing by 0.2% and 0.3% in quarterly terms in Q3

and Q4, respectively, although the year-on-year rates remained negative in the last three

quarters of the year (-1.2%, -0.6% and -0.2%, respectively). Thus, growth in 2014 amounted

to 0.2% (compared with 2.7% in 2013), on the back of continued weakness in domestic

demand, which contributed just 0.1 pp to growth in 2014. The sharp contraction in

investment continued (some 6% year-on-year in Q4), while private consumption posted

moderate growth. External demand contributed 0.4 pp in Q4, with exports falling sharply

(-10.7% year-on-year) owing to weak manufacturing and oil sales, by product, and to weak

exports to China and the EU, by country. The higher frequency indicators for 2015 Q1 point

to continued weakness in domestic demand, exacerbated by the effect of the most severe

drought in decades. The labour market shows some signs of weakness, as job creation

rates continued to fall, especially in manufacturing, even though the unemployment rate

remained at all-time lows (partly owing to the decline in the labour force) and real wages

rose by 2.4%. Inflation continued to climb throughout the year, closing 2014 at 6.4% year-

on-year, and in January 2015 it broke through the target range ceiling (+4.5%, with bands

of +/-2%) as a consequence of the government’s adjustment of administered prices,

reaching 8.1% year-on-year in March. Core inflation has rebounded, especially since the

start of the year (8% in March), as have inflation expectations, which anticipate that inflation

will not return to within the central bank’s target range until mid-2016. Against this backdrop,

shortly after the elections the central bank surprised the markets by resuming official

interest rate hikes, with a cumulative increase of 125 bp up to 12.75%, in an attempt to

anchor inflation expectations. In addition, the volume of intervention by means of currency

Economic developments by country


swaps was first halved, and this instrument was then eliminated at the end of March. The

Brazilian real depreciated by 14% against the dollar in the six-month period, reaching more

than 3.3 reais per dollar in 2015 Q1, its lowest point since 2003. From the fiscal standpoint

(see Chart 11), the primary balance stood at -0.6% of GDP in 2014, a sharp deterioration

compared with previous years (1.8% of GDP in 2013) and short of the target for the year

(+0.2% of GDP) which had already been revised down. However, the new government has

announced a fiscal package consisting of expenditure cuts equivalent to 0.7% of GDP and

tax increases equivalent to 0.4% of GDP. These measures aim to redress the fiscal accounts

and restore credibility in the medium term, although in the short term they could have a

negative impact on activity and drive up inflation in 2015. Turning to the external sector, the

current account deficit widened to 4% of GDP in 2014 (compared with 3.6% of GDP in

2013) as a result of the erosion of the trade surplus and the emergence of a modest deficit

(0.2% of GDP) associated with the decline in the terms of trade and lower exports to China.

In the financial account, portfolio inflows rose moderately, from 1.1% of GDP in 2013 to

1.4% in 2014, taking advantage of Brazil’s higher interest rates. Moody’s placed the outlook

on the sovereign rating to negative and Standard and Poors left it unchanged.

The Mexican economy grew by 2.1% in 2014, compared with 1.4% in 2013, recovering

throughout H2, albeit at a slower than expected pace. On the demand side, exports continued

to be the main growth driver (7.1% in Q3 and 10.3% in Q4), boosted by the growth in activity

in the United States and its impact on the manufacturing industry (especially the automobile

industry) (see Chart 11) which more than offset the decline in oil exports. Investment was the

most dynamic component of domestic demand, growing by 2.3% in the year (compared with

a fall of 1.6% in 2013), in view of the good performance of private investment (5%) which

more than offset the decline in public investment (-7%). Private consumption remained weak,

although the good performance of the labour market, which is benefiting from the plan to

encourage employment in the formal sector, provided it with heightened momentum. Indeed

the unemployment rate fell to 4.4% in Q4. The published data for 2015 Q1 point to growth

rates similar to those seen in Q4, driven by external demand. At the end of the year inflation

stood at 4.1% year-on-year, slightly above the upper bound of the central bank’s target range

(3% ± 1%), with core inflation below the headline rate (2.4% in February) and inflation

expectations for the medium and long term anchored around 3%. The Mexican peso

depreciated in tandem with the decline in oil prices, reaching its lowest point for six years and

triggering the automatic intervention rule to curb volatility. Subsequently, supply was increased

BRAZIL AND MEXICO CHART 11


-5

0

5

10

15

20

25

30

2012 2013 2014 2015

TOTAL REVENUE TOTAL EXPENDITURE

CORPORATE INCOME TAX UNEMPLOYMENT BENEFIT

BRAZIL. GOVERNMENT REVENUE AND EXPENDITURE

% y-o-y

20 21 22 23 24 25 26 27 28 29 30

-40 -30 -20 -10

0 10 20 30 40 50 60

2011 Q1 2012 Q1 2013 Q1 2014 Q1

VEHICLE EXPORTS

OIL EXPORTS

VEHICLE EXPORTS/TOTAL EXPORTS (right-hand scale)

MEXICO. OIL AND VEHICLE EXPORTS

% y-o-y


by a further $52 million per day at auctions with no minimum price, as downward pressure

heightened. In this setting, the central bank has held official rates at 3% throughout the last

six months, pointing to possible synchronisation of monetary policy with the Federal Reserve,

and in consequence markets are factoring in the first rate increase for 2015 Q3. On the fiscal

front, public finances worsened owing to the slowdown in revenue which was attributable,

above all, to the 42% slide in oil revenue, despite the positive effect of the tax reform approved

in October 2013 and the currency depreciation. Thus the deficit stood at 3.2% of GDP

(compared with the target of 2.5%), almost 1 pp above the 2013 figure. Against this backdrop,

in January the Mexican government announced public spending cuts of 0.7% of GDP for

2015, particularly affecting current spending but also investments in Pemex and the Federal

Electricity Committee, and further cuts for 2016.

In Argentina the weak activity that had characterised 2014 H1 continued in H2. GDP grew by

just 0.1% and 0% in quarter-on-quarter terms in Q3 and Q4, respectively, meaning that in

2014 overall GDP rose by 0.5%, compared with 2.9% in 2013. The key factor behind the

weak activity levels in 2014 are the restrictions on manufacturing imposed due to import

controls, which have had a particularly harsh impact on intermediate goods, against the

current backdrop of trade and financial isolation and the scarcity of foreign currency. On the

expenditure side, the rate of decline of investment accelerated year-on-year to 4.9% in Q3

and to 9.7% in Q4, resulting in a fall of 5.6% in the year overall. Household consumption

decreased by 0.5% in 2014, after a decade of growth over 3%, reflecting the exhaustion of

domestic sources of growth. In turn, government consumption rose by 2.8% in the year

overall (the lowest figure in a decade), after the rate of growth accelerated in Q4 to 3.8% year-

on-year. Conversely, the external sector’s contribution went from a negative 1.4 pp to a

positive 1.4 pp as a consequence of the severe contraction (more than 12%) in imports, more

than offsetting the decrease in exports (see Chart 12) which felt the brunt of the decline in the

terms of trade and weak external demand, especially from Brazil, the country’s leading trading

partner. The forecasts for 2015 point to a continued weak economic performance. In this

setting, in 2014 the current account deficit widened to 0.9% (from 0.8% in 2013). In turn,

international currency reserves stabilised around $30 billion, thanks to import controls and

several currency swaps activated in Chinese yuan ($3.8 billion). The official inflation rate

reached 23.9% year-on-year in December and although the fall in oil prices and the

disappearance of the effect of the sharp devaluation in early 2014 are helping to smooth it,

the continued monetisation of the budget deficit, which closed the year at over 3% of GDP,

remains a significant upside risk factor. The increase in the budget deficit was a result of

higher public spending (42% per annum), arising from subsidies to the private sector, which

more than offset the higher revenue (41%). The official exchange rate depreciated by almost

50% in 2014, closing the year at 8.1 pesos per dollar, although the rate of depreciation slowed

in H2 and the gap with respect to the unofficial exchange rate narrowed. The expiry in 2015

of the Rights Upon Future Offers (RUFO) clause relating to the restructured debt, which

granted holders of restructured bonds the right to any improved terms granted to other

creditors, did not prompt any change in the negotiations with the holdout creditors, meaning

that the country remains in a situation of sovereign default on its restructured debt.

Chile saw a sharp deceleration in economic activity in 2014, although the pace of slowdown

moderated in the closing months of the year and, especially, in early 2015. In 2014 overall,

GDP grew by 1.9% year-on-year and the data for both 2013 and 2012 were revised up by

0.1 pp, to 4.2% and 5.5%, respectively. In quarterly terms, the economy grew at a slightly

faster pace (0.9%) in 2014 Q4, and in particular the rate of contraction of domestic demand

moderated, driven by public spending (5.5% year-on-year) and by gross fixed capital

formation which moved into positive territory (0.5% year-on-year) after five consecutive


quarters of markedly negative figures. External demand made a positive contribution

(3.2 pp) to growth in 2014, as imports declined. The unemployment rate remained low

(6.3% of the labour force). The trade surplus widened, triggering a very substantial correction

in the current account deficit (1.2% of GDP, compared with 3.4% in 2013). In the financial

account, foreign direct investment and portfolio investment rose. Inflation, which rebounded

to 5.7% year-on-year in October, has moderated in recent months, partly as a result of the

drop in oil prices, reaching the upper bound of the target range. The central bank has made

one official interest rate cut since September, taking rates down 25 bp to 3%. On the fiscal

front, in 2014 the deficit amounted to 1.6% of GDP (above the 0.9% estimated in the

budget law) and the structural deficit to 0.5%, owing to higher spending, against a backdrop

of cyclical slowdown and as a consequence of lower copper revenues (2% of GDP and

10% of tax revenue), virtually half the 2011 figure. In the first year of the tax reform, the

forecast increase in revenue (0.3% of GDP) was achieved. In 2015, tax revenue is forecast

to grow by 2% of GDP thanks to the tax reform, with an effective fiscal deficit of 1.9% of

GDP and a structural deficit of 1.1% of GDP. Both the stabilisation funds and the low

sovereign debt continue to allow Chile to implement a counter-cyclical tax policy.

In 2014 Colombia posted the highest growth in the region, as GDP rose by 4.6% (compared

with 4.9% in 2013). However the pace of growth slowed significantly in the course of the

year, from 6.4% year-on-year in Q1 to 3.5% in Q4, as a result of the deceleration in

domestic demand and, in particular, in government consumption and investment (even

though, in the year as a whole, the latter was the most dynamic component, posting

growth of almost 11%). The pace of growth of private consumption, however, accelerated

in Q4, offsetting the slowdown in the other components. The contribution of external

demand turned negative again in 2014 (-2.8 pp) as a consequence of the poor performance

of exports (-1.7%), marked by the sharp slide in oil exports, which contrasted with the

strong import performance (9.2%), reflecting the good investment momentum. Hence the

trade deficit widened to 2.4% of GDP in the year (see Chart 12) and the current account

balance deteriorated sharply (-5.2% of GDP, compared with -3.2% in 2013). In the financial

account, direct investment fell as a result of lower investment in the mining and energy

sector, but portfolio investment inflows rose by 68%. The Q1 indicators signal that the rate

of growth will continue to slow, even though both credit and the labour market continue to

perform well. Inflation, which at the end of 2014 was very close to the upper bound of the

target range (+3%, with bands of +/-1 %), began to rise in the closing months of the year

and continued to do so in early 2015, reaching 4.6% in March, as a consequence of higher

SOURCES: INDEC, Secretaria de Agricultura of Argentina and DANE.

ARGENTINA AND COLOMBIA CHART 12

-30

-20

-10

0

10

20

30

40

50

60

2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1

EXPORTS IMPORTS SOYBEAN PRICE

ARGENTINA. FOREIGN TRADE

% y-o-y

Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 20

40

60

80

100

120

-2.0

-1.5

-1.0

-0.5

0.0

0.5

TRADE BALANCE OIL PRICE (right-hand scale)

COLOMBIA. TRADE BALANCE AND OIL

$bn $/barrel


food prices and the currency depreciation. In this setting, the central bank has left the

official interest rate unchanged at 4.5% since September, following the rate increases in

July and August, and has halted its dollar purchases on the currency markets. The

exchange rate fell by more than 20% against the dollar in 2014, and has fallen by more

than 8% in 2015 to March, against a backdrop of lower oil prices and the worsening

growth outlook. In the fiscal arena, in 2014 Colombia met its structural deficit reduction

target of 2.3% of GDP, recording a figure of 2.4%. For 2015, compliance with the fiscal rule

initially demanded a tax increase in order to achieve higher revenues. However, in view of

the expected decline in oil revenues, the government announced expenditure cuts of 3%

and admitted a cyclical deviation of -0.6% in the budget update, entailing an increase in

the budget deficit to 2.8% of GDP, which will be financed by issuing government debt.

In Peru the loss of economic momentum deepened in Q4, with growth of 0.4% in quarter-on-

quarter terms and year-on-year growth of 1%. In the year overall, GDP rose by 2.4%, well

short of the 2013 figure (5.8%). By component, private consumption decelerated moderately,

but investment fell by 2% owing to the contraction in mining output. External demand made

a marginally positive contribution due to the import correction. The current account deficit

narrowed in 2014, although it still stood at 4.1% of GDP, as the trade balance deteriorated,

moving from a surplus to a deficit owing to the fall in metal prices. In 2015, activity and

confidence indicators point to moderate economic growth rates at the start of the year. For its

part, inflation eased to within the monetary authority’s target range, posting a year-on-year

rate of 2.8% in February 2015. The central bank held interest rates unchanged, although

certain macro-prudential measures were taken (local currency bank reserve requirements

were lowered and limits were imposed on currency derivative operations), in a setting of

depreciation of the new sol. Sales of dollars were also made to curb exchange rate volatility

and new intervention measures were introduced using currency swaps. On the fiscal front, in

2014 the public sector primary deficit was equivalent to 0.1% of GDP.

The Venezuelan economy recorded a very poor performance in 2014. Ahead of the release

of the GDP figures for Q4, GDP fell by 4.9% year-on-year in H1 and by 2.3% in Q3. By

component, this is attributable to the collapse in investment (-27.5% in Q1, -18% in Q2

and -9.3% in Q3), against a backdrop of import restrictions as a result of the extreme

scarcity of foreign currency. The poor performance of private consumption moderated in

the course of the year, going from -4.2% in H1 to -1.6% in Q3, with both credit and the

labour market continuing to perform reasonably favourably, despite the significant drop in

real wages. Government consumption remained the most dynamic component, growing

by 2.1% in Q3. The positive contribution made by external demand is explained by the

decline in imports, although this contribution contracted sharply as the year progressed

(from 13.1 pp in Q1 to 2 pp in Q3). The fall in oil prices is responsible for the decline of

almost 10% in nominal terms in exports. Nevertheless, as imports also contracted, the

current account surplus stood at 3% of GDP in Q3 2014 (slightly above the figure of 2.3%

in 2013). In October 2014, international reserves amounted to 6% of GDP, but liquid

reserves were less than $6 billion, as the majority of reserves are held in gold. Inflation

soared to 65% in December (the latest figure released), in view of the shortage of foreign

currency for imports, the increase in the money supply to finance the budget deficit and

the effective exchange rate depreciation in view of the closure ordered of the SICAD I and

SICAD II markets and the opening of a new parallel free-floating foreign exchange market

(SIMADI) on which the currency traded 93% below the official exchange rate. The rating

agencies downgraded the country’s sovereign rating to CCC.

17.4.2015.

Documents

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